Refining Model Assumptions Reflecting Management Guidance Alstria Model – Refining Our Assumptions After completing a working copy of our model using temporary placeholders, it is now time to reflect management guidance on key drivers of the business model. Typically management might give guidance on items such as: What will 2011E Total Rental Income look like? Will there be any changes in NOI Margin from the 2010 level of 91.9%? Will Corporate Expense change from 2010 levels? Is there any other guidance on key financial metrics, like Interest Expense, FFO or Dividends? Some guidance is offered in the annual report’s Outlook Section (p. 27), the Financial Guidance for 2011 slides in the 2010 investor presentation (pg. 9 - 11), and the 2010 conference call transcript
Refining Model Assumptions Organic Rental Income Assumptions Alstria Model – Refining Organic Rental Income Assumptions From the investor presentation we understand lease expiries and strategic vacancies will reduce rents by €1.7m on the organic side While no organic upside guidance was given, from the conference call we learned, 2010A inflation-related rent indexation was about €500k. We assume a similar amount for 2011E This brings us to a 2011E organic rental loss of €1.2m, or -1.3% vs. 2010A levels For 2012E, we keep our 2.0% initial estimate, hypothesizing a moderate uptick in rental indexation without significant expiries Input 2011E Organic rental growth: D4 = -1.3%
Refining Model Assumptions External Rental Income Assumptions Alstria Model – Refining External Rental Income Assumptions From the investor presentation we see €165m in 2010A Sales at a 4.7% yield vs. €67m of 2011E Acquisitions (announced in 2010, but closing in 2011E) at a 6.8% yield The full-year impact on 2011E from 2010A Sales (€4.5m) offset by rent gains from 2011E Acquisitions (€3.1m) sums to a guided 2011E external rent loss of €1.4m
Refining Model Assumptions External Rental Income Assumptions Alstria Model – Refining External Rental Income Assumptions Conference call guidance to moderate additional B/S capacity suggests €33m of incremental acquisitions aren’t unrealistic – in line with our previous €100m placeholder We assume a total 2011E Acquisition Yield at 6.8%, the same level as deals recently closed For 2012E, we set Acquisition Volume & Sales Volume to €50m, ensuring that no incremental acquisition debt is needed, in line with management’s guided deleveraging policy We maintain our original 2012E Acquisition Yield of 6.5% and 2012E Sales Yield of 5.0% Given the high 2010A Sales Volume, we zero out further sales for 2011E 2011E Total Rental Income roughly in line with full-year guidance to €86m
Refining Model Assumptions Operating Margin Assumptions Alstria Model – Refining NOI Margin Assumptions From the investor presentation and conference call we learned that Operating Expenses will likely rise by €3.0m in 2011E This suggests a 2011E NOI Margin of ca. 88.25% For 2012E we take the mid-point of the conference call guidance range of 8-10% - or 9.0% - which implies a 2012E NOI Margin of 91.0% Reflect guidance to 2011E Operating Expenses increase of €3m and a normalized 2012E NOI Margin of 91%
Refining Model Assumptions Corporate Expense Assumptions Alstria Model – Refining Corporate Expense Assumptions From the conference call we understand that SG&A (Selling General and Administrative Expenses) aka Corporate Expense is “highly scalable” – i.e. it is not expected to increase, even as the business expands Keep flat Corporate Expense assumption unchanged in line with guidance.
Refining Model Assumptions Interest Expense Assumptions Alstria Model – Refining Interest Expense Assumptions From the investor presentation and the conference call we know that management anticipates an Interest Expense reduction of €8.6m In our model, Interest Expense calculates dynamically and isn’t directly taken from management guidance However, we should still verify that our figures aren’t too far off management guidance. Otherwise one of our assumptions may be unrealistic Double-checking our calculated 2011E Cash Interest Expense figure of €34.7m, implies an €8.2m decline vs. 2010A Cash Interest Expense – close enough to management guidance Calculated decline in 2011E Cash Interest Expense of €8.2m is close to management guidance.
Refining Model Assumptions FFO Assumptions Alstria Model – Refining FFO Assumptions On a 2011E FFO basis, management is guiding to €30m, very close to our €30.1m figure On a y/y growth basis, this implies ca. 9% FFO growth for 2011E. Recall however, that our assessment of 2010A FFO was €30.2m – about €2.7m above management’s calculated FFO of €27.5m. As such, we project more-or- less flat 2011E FFO For 2012E, we expect strong FFO growth of over 30%, however, as rental contributions from recent acquisitions hit the P&L and margins increase Calculated 2011E FFO is very close to management guidance.
Refining Model Assumptions FFO per Share Assumptions Alstria Model – FFO per Share Assumptions To derive 2011E FFO per Share we have to update our share number Recall, we used the Average Shares Outstanding in 2010A and applied these to future years 2011E and 2012E This is technically inaccurate however, as 2011E Shares Outstanding should be based on year-end 2010A shares, not 2010A Average Shares Using the corrected share number, we derive 2011E FFO per Share of €0.49 Note: Alstria’s reported FFO per share numbers are calculated using year-end shares, not average shares as in our analysis. Alstria’s reported FFO per Share numbers therefore need to be adjusted accordingly to be comparable Using corrected 2011E Shares Outstanding of 61.6m, 2011E FFO per Share is €0.49
Refining Model Assumptions Dividend Assumptions Alstria Model – Refining Dividend Assumptions The final guidance to be incorporated into our model concerns the 2011E Dividend of €0.44 per share and the target future year Payout Ratio of 90% The guided Payout Ratio of 90% implies 2011E Dividends of €0.44 and 2012E Dividends of €0.58
Comparing Projections with Actual Results Comparing 2011E Projections w/ 2011A Actuals Alstria Model – Comparing Projections to Actuals Following publication of Alstria’s 2011 Results on Feb 21, 2012 we can cross-check our projections against actual results Examining our projections in light of actuals shows a significant deviation, as our 2011E FFO estimate fell 23% short of actual results (10% on an FFO per Share basis). Part of this delta is due to higher-than expected acquisitions and a related capital increase. Other large variances arose from a miss on JV Income. The takeaway is that studying the financials & reflecting management guidance gets you only so far but does not guarantee accurate estimates. In the famous words of Geroge Box “all models are wrong, but some are useful.”
The Usefulness of Financial Models A Word of Caution The Usefulness of Financial Models Certainly there is merit to the analytical process of financial modeling: combing through public data, interviewing management teams, learning about industry trends and comparing different companies on specific, empirical data. Unfortunately, models are often misunderstood (and misused) as accurate or precise predictors. Exactness in forecasting does not exist and reliance on model estimates is a dangerous mistake. In this vein, skeptical and selective use of financial models is suggested: Models can serve as a checklist & reminder to investigate published disclosure and market data, but they can never produce reliable or exact estimates. Such precision in a dynamical, complex and interconnected business environment is an illusion. Usefulness of financial projections deteriorates rapidly, the further out the forecast is made. As such, a financial estimate looking 12-18 months out is more useful than gazing 3-10 years into the future (rendering most DCF valuations falsely accurate and totally misleading). Models can sometimes be useful to give broad directional signals – e.g. Company A looks much more expensive or risky than Company B – but they can never give a specific or accurate answer, like Company A is worth €8.57 per share. Given the inherent inaccuracies associated with financial projections, buy/sell decisions should never be exclusively based on such projections. Again, a broad directional signal is the best one can hope for. Even then common sense always trumps model outputs.